Feeling squeezed by fast-rising home prices, higher mortgage rates, and larger monthly mortgage payments, homebuyers are left wondering when the market will see some relief and home prices will start to drop.
2022 has been difficult for those trying to afford a home. In January, home prices were rising fast, but at least mortgage rates were near record lows, offering some comfort for those trying to afford a home.
That’s no longer the case. Mortgage rates have quickly raced toward 6%, rising two whole percentage points since the start of the year. And at the same time, home prices have kept going up. While there have been signs of prices dropping — the national median existing-home price fell $10,000 from June to $403,800 in July, according to the National Association of Realtors — they’re still more than 10% higher than they were at this point last year.
Experts say it’s unlikely prices will drop in any significant way nationwide anytime soon. And while the rate at which home prices are rising will slow, that’ll likely come because fewer people can afford to shop in a pricier market. On a local level, individual markets might see prices come down, but experts say a big drop across the board is unlikely barring a big economic shift.
“You have this continued pressure around purchasing that even if we see dips, I think you’re going to see enough demand on the dips to keep home prices from going down by any true measure,” says Nicole Rueth, producing branch manager with the Rueth Team of Fairway Independent Mortgage Corp. “I think the appreciation is going to slow back down to where a normal appreciation should be.”
What’s Caused the Rise In Home Prices?
The median sales price for an existing home in May was $407,600, up 14.8% from a year earlier, according to data from the National Association of Realtors (NAR). Home prices are rising dramatically, but the pace has slowed a little bit in recent months. Sales prices were around 20% higher year-over-year earlier in the year.
Behind that rise are two concurrent trends, each playing on a different side of the formula behind prices. The supply of available homes is down, due to fewer people choosing to move out of existing homes and the underbuilding of new houses in the past decade. “We have not been keeping pace with the demand for homeownership for a decade now,” says Clare Losey, assistant research economist with the Texas Real Estate Research Center at Texas A&M University.
Demand is higher because of demographic shifts – millennials are in their prime homebuying years – and the rise of remote work is allowing more people to move further from jobs and city centers. “General population growth is going to continue to put upward pressure on the demand for homes,” Losey says.
What Will Make Home Prices Drop?
Prices will drop when either supply increases significantly or demand falls, and experts say we’re much more likely to see the latter. A main driver behind the potential decrease in demand, experts say, is the dramatic shift in mortgage rates. The average 30-year fixed mortgage rate is up more than two full percentage points since the start of the year, eating away at affordability for many buyers. Mortgage rates have cut the purchasing power of buyers for the median priced home by about 14%, Losey says. “Higher rates reduce a buyer’s purchasing power, so it diminishes purchase affordability or the maximum home price that is affordable to them,” she says.
Just because mortgage rates are up doesn’t mean demand will drop significantly, Rueth says. “Life events create the need,” she says. “The need will be there no matter the interest rate. But the speed at which interest rates are changing is creating fear.” The pace at which rates have risen could’ve caused the opposite effect and increased demand, as buyers tried to get into the market before they went up higher.
In some areas, there’s already some moderation of prices, says Marty Green, a principal with Texas mortgage law firm Polunsky Beitel Green. The aspirational prices sellers are listing are “coming back to a little bit more reality,” he says. Home sales are already slowing down, with NAR reporting sales of existing homes in May were down 3.4% from April and 8.6% from the previous May.
While price growth is likely to slow, that doesn’t mean prices will drop. They’ll just go up by less than the current rate, perhaps by closer to 3% rather than 20%, experts say. Freddie Mac predicted home price growth will slow this year, from 17.8% last year to 10.4% in 2022 and 5% next year. “Firstly, demand for homeownership has to fall,” Losey says. “If that happens and in any particular market there is able to be more of a balance between the demand for homeownership and the accompanying supply of homes, price growth should certainly moderate. Not to say that home prices would decline, but the rate of growth should certainly decline.”
To actually drop, there would have to be some changes on the supply side – an influx of newly built houses, or a lot of people moving out and not just into other single-family homes. “You’re still going to have the inventory constrained across the country, so prices will probably moderate,” Green says. “I don’t see them coming down in any material manner in the coming months absent there being a true shock to the system, a really bad recession or something like that.”
Individual Markets May Vary
Of course, what happens nationwide doesn’t necessarily happen in your neighborhood. Some communities likely will see prices come down, experts say. “Each market’s going to behave a little bit differently,” Green says. “Some of the markets and submarkets within them are going to probably level out more quickly just because the supply and demand will dictate that.”
Some markets are more likely to see prices drop in the next year than others. For example, CoreLogic ranked the Lake Havasu City-Kingman and Prescott areas of Arizona, along with Bridgeport, Connecticut, as being at very high risk of seeing a price decline in the next 12 months.
Even within a metropolitan area or state, different communities might see prices drop, Green says. Some areas might have too many expensive, extravagant houses, and the number of people who can afford them will drop as mortgage rates rise.
The markets that have been the hottest the past few years might see drops if the people who moved there during the pandemic decide they don’t have everything they wanted, Rueth says. “It’s so market-specific,” she says. “Some of those markets, I imagine maybe they do dip a little bit because they got a little over-excited.”
An adjustable-rate mortgage is riskier than a fixed-rate one, but it might make it easier to afford a home as prices rise. Just be aware of the risk and prepare to refinance if rates drop significantly again.
What Homebuyers Can Do
Buying can still be a good choice. While home prices are going up, so are rents, and if you buy a home with a fixed-rate mortgage, your monthly payment will stay the same while the rent around you will keep going up. Rueth says those who buy a home are able to get a “buffer against inflation.”
Work With a Team
While you’re going through the buying journey, make sure you have a team of professionals. The limited supply of houses means markets are incredibly competitive, and while that might slow as demand softens, they’ll still be seller’s markets. “Find good, trusted, reliable professionals who can help walk you through this process. Go to a good mortgage lender and seek a preapproval for a mortgage, that way walking into the home search process, you’ll already have an idea of what’s affordable to you,” Losey says.
That also includes getting an experienced real estate agent who can help you navigate a competitive market. “Since it’s a seller’s market right now, it’s particularly advantageous for buyers to try to work closely with professionals who have that experience and expertise,” Losey says
Think Outside the Box
Buyers in hot markets might also have to get creative with what homes they consider, Losey says. “You’re just going to have to be willing to be pretty flexible in those hot markets about what it is you want – space, amenities, location, etc., as well as types of financing,” she says. “Buyers are going to have to be willing to resort to more non-traditional measures in very competitive markets because demand is that strong.”
One way to combat rising mortgage rates is to consider adjustable-rate loans, Green says. While ARMs carry some risk that the interest rate will rise after the initial period with a lower fixed rate ends, they offer savings in the short-term while giving you time to refinance if rates drop. “Look at some adjustable rate products that will impact that affordability in a positive way,” he says. “Don’t be afraid of those products because they might be the best answer for a lot of people.”
Patience Is a Virtue, Sometimes
High prices are outside of your control, Green says. Focus on getting a home that is affordable for you when the time is right for you. “Be patient but don’t be overly patient,” he says. “If you’re waiting on the market to crash, that’s probably not the most likely outcome here and you’ll likely be waiting for a long time.”